How does Pearce Bespoke recognize initial franchise fees as revenue?
Pearce_Bespoke Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company recognizes revenue under the guidance of ASC 606 "Contracts with Customers".
Each franchise agreement is comprised of several performance obligations. The Company identifies those performance obligations, determines the contract price for each obligation, allocates the transaction price to each performance obligation, and recognizes revenue when the Company has satisfied the performance obligation by transferring control of the good or service to the franchisee. The Company is using the practical expedient under the guidance of ASC 952-606 and is treating all pre-opening activities as distinct from the franchise license as defined in the next paragraph. The Company has determined that 50% of its initial franchise fee is allocable to the pre-opening obligations in the franchise contract. The remainder of performance obligations not related to the grant of the license represent a single performance obligation. and are recognized over the term of the respective franchise agreement from the date the agreement is executed. Unearned initial fee revenues from franchisee acquisition and acceptance will be recorded as deferred revenue and recognized as revenue over the term of the contract which is currently 10 years.
When a franchisee purchases a franchise, the Company grants the franchisee the right to use the proprietary methods, techniques, trade dress, trademarks, and logos ("the license") for a specific period of time and in a specific territory. The license is symbolic intellectual property. Revenues related to the license are continuing royalties of 10% of gross sales, subject to a minimum royalty as defined in the franchise agreement. Royalty revenues are compensation for the use of the license in the territory, over the term of the contract, and will be used in part to continue the development of the Company's brand, the franchise system and provide on-going support for the Company's franchisees. The royalties are billed weekly and are recognized as revenue when earned.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 39)
What This Means (2025 FDD)
According to Pearce Bespoke's 2025 Franchise Disclosure Document, the company uses specific accounting methods for recognizing initial franchise fees as revenue. Pearce Bespoke recognizes revenue under ASC 606, "Contracts with Customers." The franchise agreement includes several performance obligations. Pearce Bespoke identifies these obligations, determines the contract price for each, allocates the transaction price, and recognizes revenue when it has satisfied the obligation by transferring control of the good or service to the franchisee. Pearce Bespoke uses a practical approach under ASC 952-606, treating all pre-opening activities as distinct from the franchise license.
Specifically, 50% of the initial franchise fee is allocated to pre-opening obligations. The remaining obligations not related to the license are treated as a single performance obligation and are recognized over the term of the franchise agreement, which is currently 10 years, from the date the agreement is executed. Unearned initial fee revenues from franchisee acquisition and acceptance are recorded as deferred revenue and recognized as revenue over this 10-year contract term.
For franchisees, this means that the initial franchise fee they pay to Pearce Bespoke is not immediately recognized as revenue by the company. Instead, a portion is allocated to pre-opening services, and the remainder is recognized gradually over the 10-year term of the franchise agreement. This approach aligns revenue recognition with the delivery of services and the ongoing rights granted to the franchisee, which is a common practice in the franchise industry.
The license granted to the franchisee allows them to use Pearce Bespoke's methods, techniques, trade dress, trademarks, and logos. Revenues related to this license are the continuing royalties of 10% of gross sales, subject to a minimum royalty as defined in the franchise agreement. These royalties compensate for the use of the license and support the ongoing development of the brand and franchise system. The royalties are billed weekly and recognized as revenue when earned.